Abstract

The aim of this paper is two-fold. First, we analyze the role of wage rigidities in labor market adjustments to international trade and biased technological progress in a small open economy. We introduce efficiency wages into a neoclassical trade model and show that changes in relative wages are independent of wage rigidities. Second, we examine the impact of capital market integration on relative wages and unemployment and find that wage inequality will rise (fall) and unemployment will fall (rise) when capital is being imported (exported).